China’s economic growth in the 21st century (prior to the COIVD-19 pandemic), has been nothing short of remarkable - annual GDP growth has never dipped below 6% from 2000 to 2019. Nonetheless, there has been skepticisms over the sustainability of China’s growth model as of late. This is particularly concerning given how increasingly entrenched China’s growth is in our global economy. The second largest economy in the world has been relying great on exports and intensive use of credit in order to fuel growth. The issue of such a growth model are as follows:

1. Export-driven: China's major export goods consists mostly of machineries, textiles, clothes, smartphones and integrated circuits. In fact China’s accounts for 13% of world exports. This is largely due to China’s ability to produce at lower costs while also retaining control of its exchange rate policy to maintain export competitiveness. Yet, relying on other economies to buy what you produce is not always reliable. Firstly, many countries are outpacing China’s ability to produce at low costs. Southeast Asian countries such as Vietnam has increasingly become a more preferable location for firms to outsource production to. Hence, China is facing increasing competition in the international trade scene. Secondly, external shocks can significantly impact export revenues - exports fell by almost 17.2% in early 2021 due to the COVID-19 pandemic according to data released by China’s General Administration of Customs. Finally, rising geopolitical tension between China and the West could hamper demand for Chinese exports (consider the impacts of import tariffs imposed on Chinese products).

2. Debt-driven: The rate of increase in China’s debts has been outpacing output growth, with much of investments going into “non-productive” sectors such as the property and construction sectors (I believe some of you may be familiar with ‘ghost towns’ in China, you may view the following video for more information: https://www.youtube.com/watch?v=TiTDU8MZRYw). There are a few issues with this. Firstly, crucial investment funds and resources are not directed to more productive sectors that could increase the productive capacity of China and hence provide sustainable long-term growth. Next, the capital markets are too closely tied to the well-being of the property sector - lack of diversification can be troublesome as a shock to the particular industry can easily drag down the rest of the economy. [There are more to this point, but it is outside the scope for the A-Levels syllabus, however if you are interested you may want to read up about it]

What has the Chinese government been doing:

1. Limiting access to investment funds for sectors deemed to be unproductive or ill-aligned with goals of inclusive growth and common prosperity.

2. Boosting domestic consumption is now top of China’s economic priorities. A fiver year plan has been enacted in 2021 to achieve such a goal. Monetary and fiscal policies of late has been tailored to encourage consumption - as recent as March 2022, the Chinese government has committed to cutting interest rates as well as further reduction in tax rates. The Ministry of Commerce even held a month-long “national consumption festival” in May 2021 to kickstart household spending in the midst of sluggish consumer demand during the pandemic.

3. Increase tax cuts and tax rebates to spur growth in the technology and R&D sectors to productive capacity of the economy and achieve technological independence. Officials are also pushing banks to lend to local businesses and hence encourage domestic investments.